How farmers are dealing with volatility

Max Roberts

Chairman

Volatility in the dairy industry• Volatility is nothing new for our industry

• High input industry that is highly exposed to trade• 45% of production exported, significant imports

• Farm gate prices are driven by international markets• International market accounts for just 7% of world milk

production• Dairy trade is highly distorted by Nth Hemisphere policies

• On farm, bought in feed accounts for 30% of cash costs• Subject to grain and hay market volatility

International dairy commodity prices

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

US

$/t

SMP WMP Butter Cheese

Source: Dairy Australia

Income volatility –

Source: ABARE

Income volatility – not just milk price

Source: DA and ABARE

Volatility and uncertainty is increasing

FarmFinancial People

Physical

External environment

Grain

Water

FuelFertilizer

InputsExchange

rates

Economic

conditions

Govt

policies

Community

attitudes

New

technologies

Weather

Interest rates

How are farmers dealing with volatility• Dairy is a highly adaptable production system

• Water vs grain & supplements• Strategic use of inputs – water, fertiliser• Diversified feed sources – new supplements & crops

• An integrated supply chain• Longer term strategic relationships – forward contracts• Options for selling milk - contract vs supply agreement• Relationship with dairy companies

• Prioritising business resilience• Whole of farm planning and scenario testing• Production not the key objective• A longer term view of profitability and wealth creation

Increasing use of FMDs

At 30 September 2009 3,707 dairy farmers held Farm Management Deposits totalling $214 million

Source: DAFF

Typical Australian dairy production system ?

• A continuum of systems operating across Australia• Many farms feature elements of all these systems - more

flexible and opportunistic

Rain-fed pasture Irrigated pasture Supplementary grain & concentrate feeding

Feedlot

A range of feeding systems

Source: National Dairy Farmer Survey 2009

• Highly adaptable production systems• An integrated supply chain• Prioritising business resilience

How are farmers dealing with volatility

How is the industry responding?• Good risk management requires an understanding of the

external environment• Dairy Moving Forward – Taking Stock• Dealing with Today, Planning for Tomorrow (DAFF)• DairyLIVE• Situation & Outlook• Grain & Hay report

• Building capability• NCDEA• People in Dairy

Dairy Moving Forward – Taking Stock• 3000 Taking Stock

sessions since 2004• Service providers trained• Collaboration with

•DAFF•DPIV•dairy companies•service providers

DairyLIVE• Linking the industry through

technology•Cost effective•Access to international expertise

• Funding from DAFF• Optimising networking and

information reach

Situation and Outlook• Whole of supply chain

analysis•Shared understanding of operating environment•Communicated via reports and presentations

• Wide target audience•Farmers•Service providers•Government

Farmers dealing with volatility• The industry is developing the tools and information to

help farmers:• Understand the context• Understand the total farm position• Test against potential scenarios to find the fault lines

• Farmers are highly professional business owners• Employ 5 to 6 employees• Generate enormous economic benefits

The way forward• Opportunity is out there

• The industry has proved it’s ability to compete and adapt• Well positioned to benefit from future demand growth

• Farmers will continue to adapt to volatility• Farms must run as a business• Require clear signals and information• Continue to build capability

• Policy settings will play an important role• Certainty of access to resources• Regulation